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Economic and Stock Market Update (2nd Quarter 2015)

This is a sample of the letter that I send to all of my management clients on a quarterly basis.

This letter will serve as our quarterly review of your accounts. The letter outlines our thoughts on the economy as well as our stock and bond strategies. Your quarterly account specific returns are found in the Performance section and the quarterly transactions are found at the end of this letter.

Economic and Stock Market Update

-GDP declined by 0.2% in the first quarter as the economy continues to struggle to gain momentum.

-Employment remains strong and personal spending (+0.9%) and income (+0.5%) are growing.

-Business spending remains weak, but there are signs of underlying strength. Merger and Acquisition activity has increased dramatically.

-We believe the US economy can break out of its funk and grow in the 3.5% to 4% range. The growth will be spurred by the stronger consumer, but businesses will unleash their vast cash holdings and also contribute to the higher growth rate. The US growth will be enough to pull the rest of the world forward.

-Stocks are overvalued and need a correction, but in the long-term they will continue to grow as the economic growth creates wealth.

-Interest rates will not rise meaningfully until petroleum prices rebound. We are seeing some growth in gas prices after they hit bottom.

Asset Allocation

We use this section to review the client’s target asset allocation and compare the actual allocation to the target.

Stock Portfolio Update

The stock market remains overvalued and needs a correction. The S&P 500 Index P/E is now at 21.5 times trailing earnings. Even the forward P/E is ahead of itself at 17.8X. The economic growth will lead to increased wealth and higher stock market value overtime. We will need to go through some sloppy periods to get value back into the market.

Based on our projections for acceleration in economic growth, we still predict the long-term growth of the market from these levels to be in the 8% range. International and EM should show higher returns over the remainder of the cycle.

The portfolio is weighted towards cyclicals based on our economic forecast. The growing economy will eventually lead to higher oil prices (our overweight in oil stocks which includes Conoco, Royal Dutch and Occidental) and commodities (Rio Tinto). Our other cyclical holdings will see increased revenues and earnings: Caterpillar, Ford, Norfolk Southern, and railroad suppliers, American Rail and Greenbrier.

Another major holding is technology. Some accounts supplement the individual holdings with Ivy Science and Technology fund. Our tech holdings include Apple, Cisco, Computer Programs, Corning and Hercules. Our other positions are held for specific growth targets or for diversification.

News: Stock Portfolio

During the quarter, General Electric announced that it would be selling most of its real estate portfolio and other remaining assets from their Capital unit division. Buyers include Blackstone and Wells Fargo. With these sales, GE will repurchase $50 billion of its own shares. The sales of the Capital division indicate a focus on the industrial business for GE.

Royal Dutch Shell purchased the BG Group for $70 billion. The purchase of BG is an effort to increase Shell’s natural gas exposure. The natural gas segment is a play on higher growth, and the purchase comes at a time when prices are very cheap. As the price of oil rises, the interest/need for natural gas becomes greater.

Verizon announced that it was purchasing AOL for $4.4 billion. AOL provides online video and advertising services. Verizon’s purchase of AOL is a strategic move to become more involved online to stay even keel with today’s trends as well as branch out from their normal business model.

Gilead Sciences announced that it would begin to pay a dividend of $1.72/share (1.40%).

We saw six companies increase their dividend this quarter: Apple (to $2.08, 11%), Blackstone (to $2.66, 14%), Caterpillar (to $3.08, 10%), Disney (to 1.32, 15%), KKR (to $0.46, 7%), and Occidental Petroleum (to $0.75, 4%).

Stocks nearing their target sales price:
Och-Ziff: $15

Bond Market Forecast and Update

The Federal Reserve will raise rates by a very small amount. The larger rate increases will matter to investors, but will not occur until the price of oil and other commodities begin to rise. In essence, we are going to see low interest rates for a while.

Our bond portfolios continue to utilize a ladder strategy of high quality bonds. We define high quality as single A or better. In some portfolios we do buy non-rated bonds, but these bonds carry a single-A or better underlying rating. Most of our A rated bonds are backed by credit enhancements like school bond guarantees. The longer-term bonds in the ladder will give the portfolio income, while the shorter-term maturities will provide cash flow. When rates rise, the short bonds will mature and give us cash to increase the portfolio’s yield. Long-term bonds will lose market value when rates rise, but we will look to hold these securities to maturity and recoup the market losses.


This section is used to provide clients with account specific returns.

Transactions for the Quarter

Each client would have their transactions detailed in this section.